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USANA Health Sciences Inc (NYSE:USNA)
Q3 2019 Earnings Call
Oct 23, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day and welcome to the Usana Health Sciences Third Quarter Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Patrique Richards, Executive Director of Investor Relations and Business Development. Please go ahead, sir.

Patrique Richards -- Executive Director of Investor Relations and Business Development

Good morning. We appreciate you joining us this morning to review our third quarter results. Today's conference call is being broadcast live via webcast and can be accessed directly from our website at ir.usana.com. Shortly, following the call, a replay will be available on our website.

As a reminder, during the course of this conference call, management will make forward-looking statements regarding future events or the future financial performance of our Company. Those statements involve risks and uncertainties that could cause actual results to differ, perhaps materially, from the results projected in such forward-looking statements.

Examples of these statements include those regarding our strategies and outlook for fiscal year 2019. We caution you that these statements should be considered in conjunction with disclosures, including specific risk factors and financial data contained in our most recent filings with the SEC.

I'm joined this morning by our CEO, Kevin Guest; our President, Jim Brown; our Chief Financial Officer, Doug Hekking; as well as other Executives here in the room today. Yesterday after the market closed, we announced our third quarter results and posted our management commentary, results, and outlook document on the Company's website.

We'll now hear brief remarks from Kevin before opening the call for questions.

Kevin G. Guest -- Chief Executive Officer and Director

Good morning and thank you for joining us. The third quarter of 2019 was a successful quarter for USANA on several fronts. Although net sales were down on a year-over-year basis, several efforts during the quarter helped us generate modest growth in both net sales and active customers on a sequential quarter basis.

In August, we held our Annual Global Convention in Salt Lake City. This event always generates a lot of excitement and this year did not disappoint. Beyond the recognition and training that we offer at the event, we also introduced several new products and business incentives to thousands of customers in attendance.

We were pleased to see our customers respond positively to the promotions and incentives that we offered throughout the quarter. These offerings contributed meaningfully to our results for the quarter and are part of our efforts to reengage associates and generate positive momentum in our business.

In China, we continue to actively monitor consumer sentiment toward health products. Although we continue to experience a challenging consumer environment in China, we were pleased to see a strong customer response to a product promotion sales incentive that we offered in China during the third quarter. The results generated by these incentives indicate to us that we have the right strategies in place to return China to growth as consumer sentiment improves over time. We plan to continue offering strategic promotions throughout the coming quarters to generate momentum in this key market.

Additionally, we are hosting our annual China national sales meeting in November, which will once again be attended by nearly 10,000 customers in Macau. At this event, we will offer our attendees a preview of our plan for China in 2020.

Before opening the call to questions, I'll comment briefly on our outlook for the fourth quarter. In our earnings release for the second quarter, we indicated that we expected a negative impact on net sales from currency exchange rates of approximately $25 million for fiscal 2019. As noted in our third quarter earnings release, we now believe that the negative impact on net sales due to currency exchange rates will be approximately $39 million or $14 million greater than previously estimated for 2019. As a result, we have narrowed our sales guidance range to reflect this new expectation.

Finally, while we continue working to align spending with sales performance and expectations, we will continue making the necessary investments to generate momentum and drive long-term growth in the business across all our markets. During the fourth quarter, we plan to continue offering promotions and incentives. While this year has not included the year-over-year growth that we originally anticipated, we remain confident in the overall strength of our business and expect to finish the year strong.

With that, I will now ask the operator to please open the line for questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] We will take our first question from Doug Lane with Lane Research. Please go ahead.

Doug Lane -- Lane Research -- Analyst

Yes, hi good morning everybody. The thing that sticks out that I wanted to ask about in China is that the account, the active associates, the preferred customers in the region still ticked down sequentially from June, and now you have a full quarter away from the 100-day review period. And I wondered if you're surprised that, that number decelerated in September from June and what you think you can do to start getting your active associate count and your customer count heading north again?

Doug Hekking -- Chief Financial Officer

Doug, I would say it really doesn't surprise. I think it's been playing a little bit of catch-up here, and trying to go back and infuse the momentum and trying to go back in aggressive consumer sentiment. It's very hard for us, so it's now even our customers out there who get some product benefits from referring folks, it's been challenging.

I think that's lessening and time will go back and be our ally here. But it's going to take some time to go back and see that stabilize. And we continue to go back, as Kevin mentioned in his prepared remarks, we continue to go back and do initiatives and promotions and different incentives to go back and stimulate the market and return there.

Our firm belief is we'll get there but it is going to take some time and we're going to have to be active in playing a role and having that return to levels where we see kind of regular increases.

Doug Lane -- Lane Research -- Analyst

Do we expect then in the fourth quarter more of these products promotions and sales incentives that you mentioned in the third quarter? Or is there going to be sort of a change in tactic there?

Doug Hekking -- Chief Financial Officer

To be fair, we have these things and we've have these -- we have promotions and different contests and stuff going on, on a regular basis throughout the Company's history. What we did in the third quarter was a little bit larger sales impact than what you would typically see. So, we're definitely active in the fourth quarter. We're not anticipating the same type of sales lift that we had in Q3 and Q4 from the activities we're going to do, but we do think they are additive and important to market.

Doug Lane -- Lane Research -- Analyst

Okay. And just shifting gears on margins, sequentially improved certainly in the quarter. From the outside, it looks like you've resized, if you will, to your lower sales levels. Are we still, Doug, looking at longer term operating margin targets in the 14% to 15% range? Is that the right range?

Doug Hekking -- Chief Financial Officer

Yes, I think for now that's the longer term thing. I think with current sales level, that's a bit of a challenge. I think specifically, given some of the longer-term strategies that we want to go back and pursue as we've kind of consistently mentioned, we're going to keep investing in the future. So, as we see that sales line return, I think we'll go back and pick up a little operating margin along the way.

Doug Lane -- Lane Research -- Analyst

And on the gross margins, down again for the second quarter here. Is that more of a mix shift? Is that because of the mix shift out of China? Or what's going on in the gross margin line? It's coming in a little bit not as much as it was in the second quarter, but still down year-over-year in the third quarter.

Doug Hekking -- Chief Financial Officer

Yes, mix and some currency plays a role. The leverage on some costs are more fixed than nature and cost of sales also played a role. Those are really the primary contributors to a little bit of gross margin pressure. But definitely, market mix does play a role there.

Doug Lane -- Lane Research -- Analyst

Okay, that's good. And just lastly on the buyback, you picked it up pretty heavily in the third quarter and you got, I guess, only $30 million remaining on the authorization. Can you comment on, going forward, what's your view is on buyback? And should we see the authorization go up sometime over the next quarter or two?

Doug Hekking -- Chief Financial Officer

Yes, I probably won't comment on authorization until the Board gives it. It did not come up heavily as in more recent meetings here. I think what we will do is we'll be active to buy shares back to offset the impact of the management equity program. And I think that's the extent of it until we go back and maybe see opportunity or what makes sense to the Company. And those things will be dialogued and coordinated with the Board of Directors, along with Kevin and Jim.

Doug Lane -- Lane Research -- Analyst

Okay, that's great. Thanks everybody.

Operator

Thank you. We'll take our next question from Stephanie Wissink with Jefferies. Please go ahead.

Stephanie Wissink -- Jefferies -- Analyst

Thanks. Good morning everyone. We have two questions. The first relates to Doug's earlier question on China, wondering if you can just give us a sense of what tools you're using in that market that you're seeing somewhat effective to help improve the rate of sales, I'm just looking at the quarter-to-quarter progression, it looks like you did see a bit of improvement there.

And then on the promotions and sales incentive that you referenced, can you talk a little bit about how much of that is more of a temporary infusion to stimulate sales? Or how much of that is building new programs into the overall marketing kit that you're using to really manage sales growth higher coming out of this period, particularly in China? Thank you.

Kevin G. Guest -- Chief Executive Officer and Director

Yes. So, this is Kevin. In China, as we look at our activity and what we're doing and why we are investing, we made a large investment in technology, especially as it relates to WeChat and the ability for our customers to have access in a very simple, easy way through their mobile devices to be able to interact and work and deal with the Company.

And so we are making great progress from a shopping experience as well as for those who want to be involved deeper, and you saw that from a mobile and a WeChat perspective. And so that's been an area where we have focused and we continue to see activity and we are growing our technology acumen and our technology presence in China greatly, as well as in the rest of the world, but China specifically.

As we think about our promotions then, from a long-term perspective, we are hoping and anticipate that this is not a hit-and-run type promotion that it is encouraging long-term behavior and customer acquisition to participate and be part of USANA from a long-term perspective. And so our promotions and incentives are directed at customer acquisition and a long-term customer acquisition, not a short-term.

Now, we did do some product promotions that would be incremental type sales, they were received very well in the quarter. But strategically, our promotions are focused at increasing that active customer count that was referred to on our last question. And we believe that once we get the numbers that we're seeing a positive result as we grow our active customer count in China.

Stephanie Wissink -- Jefferies -- Analyst

Great. Thank you.

Operator

Thank you. We will take our next question from Frank Camma with Sidoti. Please go ahead.

Frank Camma -- Sidoti & Company -- Analyst

Hey, good morning, guys.

Doug Hekking -- Chief Financial Officer

Good morning, Frank.

Frank Camma -- Sidoti & Company -- Analyst

Can you talk about what kind of sales bump do you get from your convention in Macau?

Doug Hekking -- Chief Financial Officer

We can talk -- Frank, historically, we haven't sold products at that event before last year. Last year, we set product tax over there. And the way we positioned them, I think we learned a little bit from there. I think we generated roughly $5.5 million in sales last year in product sales. We expect that to be somewhere in the $1.5 million to $2 million this year.

And we're trying to go back -- one of the challenges right now, I think specifically in the environment they have, is I think we've made it challenging -- just because they are going through Macau back to Mainland, we made it challenging for them to bring products back over there and not get back and stuff.

So, I think we're looking at things differently and trying to be very mindful of that experience that our attendees and our consumers are having. We don't want to create headwinds for them. So, we'll work on some stuff and then we'll have follow-up type activities in that market after that event, but that's kind of where we've been in the last couple of years anyway.

Frank Camma -- Sidoti & Company -- Analyst

Okay. And can you just give a little more detail on this second review in China that you mentioned in the release and the commentary and what that entails? It doesn't sound like it's really disrupting -- incrementally, I guess, disrupting the environment. But can you just tell us what the government is looking for there?

Joshua Foukas -- Chief Legal Officer and Corporate Secretary

Yes, Frank, so this is Josh. So, the follow-on review or look-back review was anticipated by the industry. And so it really didn't catch us or our peers by surprise. And really what we've gone off so far here in the direct communications from the Chinese government as for the duration and the scope of the review, which again is product focus. It's focusing on the health foods aspect of the business. It's a look-back to -- for the government to get a greater understanding about the effectiveness of the initial review, whether companies have implemented the request to changes that the government brought up in the initial review. And advertising, quite honestly, how companies are advertising health products within and also outside of the direct sales industry.

And so, at this point, we're just following the lead of the government. We'll cooperate in anything we're asked to do. And you're correct and we mentioned this in the release, we have not seen the negative media impact that we saw earlier in the year. We've also, to this point, not had any request or counsel or restrictions from the government on meetings in various provinces.

Frank Camma -- Sidoti & Company -- Analyst

Okay. I know it's a fairly small part of your geography these days, obviously, it was big at one time. But can you comment on Hong Kong, I mean is that basically -- have sales there essentially stalled altogether? What are you seeing out there? Does it spread in to the Mainland at all or like geographically or adjacencies? I'm just trying to figure out what impact that might have on you?

Doug Hekking -- Chief Financial Officer

Hong Kong is not a real large market for us right now. But they're right in there with all the news that you've seen, kind of the geopolitical issues that are under way. But the reality is we haven't seen a great deal of growth from Hong Kong over the last couple of years as a whole. And so it's kind of hanging in there. I think given the environment and kind of -- that surround it, I think they've done a pretty decent job.

Frank Camma -- Sidoti & Company -- Analyst

Okay. My final question is -- I mean the numbers out of South Korea continue to be extremely impressive. Can you just tell us how much of a portion of sales South Korea now represents, roughly?

Doug Hekking -- Chief Financial Officer

Are you talking about just the mix?

Frank Camma -- Sidoti & Company -- Analyst

Yes, well, they're just percentage revenue, like South Korea now, does it -- it seems like it must be a decent size of your total sales given the growth rate over the last couple of years.

Doug Hekking -- Chief Financial Officer

It's just below 9% for the last quarter.

Frank Camma -- Sidoti & Company -- Analyst

Okay.

Doug Hekking -- Chief Financial Officer

As you alluded to, with that kind of having an upward trajectory and thus flatting out being down as a whole due to the circumstances that we've talked about, Korea is picking up market shares well within the USANA group of companies.

Frank Camma -- Sidoti & Company -- Analyst

I mean, I guess I can imply that that's -- I mean I guess you won't disclose until later, that must be your second-largest single country market, right? I mean...

Doug Hekking -- Chief Financial Officer

I think it depends on which time frame you look at. It'll be there probably in the not-too-distant future.

Frank Camma -- Sidoti & Company -- Analyst

Right. Okay. Fair enough. Thank you.

Doug Hekking -- Chief Financial Officer

Thanks, Frank.

Operator

Thank you. Our final question today comes from Ivan Feinseth with Tigress Financial Partners. Please go ahead.

Ivan Feinseth -- Tigress Financial Partners -- Analyst

Thank you. Congratulations on the great progress and a nice reaction to the stock.

Doug Hekking -- Chief Financial Officer

Thanks, Ivan.

Ivan Feinseth -- Tigress Financial Partners -- Analyst

I have a couple of questions as far as the recent new product introductions. Can you give me some idea what things are doing better than expected, somewhat disappointed? What has been some of the uptake from your associates and clients?

Doug Hekking -- Chief Financial Officer

Yes, we -- one product that is really performing well that I'd recommend you try if you have it, it's called CopaPrime. It's just been an outstanding product. And across the board, when we launched it, we sold out of everything we had. We're exceeding our sales expectation forecast on the CopaPrime product, which is a cognitive, brain enhance type product based upon traditional Chinese medicines and we're excited about that product and how well it's doing.

We also launched some oral care products that are performing below expectation. But we do believe that the oral care, especially, the probiotic products that we launched, is a prime product for social selling and social interaction because of how it interacts. And there are several things -- you take it at night, it -- the probiotics go to work and work on the unfriendly bacteria that gives you bad breath in the morning. So, you wake up with good breath versus bad breath and so there's a good social aspect as far as the campaign that we can handle there, which we will focus on into the next year. But yes, CopaPrime is a new product and a product in the traditional Chinese medicine world, which is somewhat new for us in a launch and it is performing very well.

Ivan Feinseth -- Tigress Financial Partners -- Analyst

That sounds very interesting. Congratulations on that. Now, how about skincare and the Celavive line, how has that been performing?

Doug Hekking -- Chief Financial Officer

Skincare and our Celavive line has been performing OK. We have some new products that we will launch at 2020 as it relates to skincare that we believe will enhance the line and address some regional issues for various parts of the world that have different needs than others. And so we are looking to expand our skincare line so that we can be more regionally conscious.

For instance, in Asia, they prefer something that has a whitening type component, but that's an example; where in the United States side of things, that's not a product at all that resonates. And so we are making advancements in skincare and hope to see it be a larger percentage of our sales in 2020.

Ivan Feinseth -- Tigress Financial Partners -- Analyst

Okay. I appreciate the questions. Again congratulations.

Doug Hekking -- Chief Financial Officer

Thanks, Ivan.

Kevin G. Guest -- Chief Executive Officer and Director

Thanks, Ivan.

Operator

Thank you. This now concludes the question-and-answer session. I would now like to turn the conference over to Mr. Pat Richards.

Patrique Richards -- Executive Director of Investor Relations and Business Development

Thank you for your questions and for your participation on today's conference call. If you have any remaining questions, please feel free to contact Investor Relations at 801-954-7961.

Operator

[Operator Closing Remarks]

Duration: 22 minutes

Call participants:

Patrique Richards -- Executive Director of Investor Relations and Business Development

Kevin G. Guest -- Chief Executive Officer and Director

Doug Hekking -- Chief Financial Officer

Joshua Foukas -- Chief Legal Officer and Corporate Secretary

Doug Lane -- Lane Research -- Analyst

Stephanie Wissink -- Jefferies -- Analyst

Frank Camma -- Sidoti & Company -- Analyst

Ivan Feinseth -- Tigress Financial Partners -- Analyst

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